Learning point from early IFRS 9 and IFRS 15 disclosures
08 March 2019
With the reporting season now in full swing, many December year-end companies will have recently gone through (or are in the latter stages of) the process of finalising their 2018 annual reports – the first year under IFRS 9 and IFRS 15. December year-end companies intending to publish their accounts a little later in the season, and those with year ends in 2019, can learn from the experiences of early reporters to help smooth their own processes.
Over the past months, companies will have been working hard to identify how the adoption of IFRS 9 and IFRS 15 will affect them. With the ‘debits and credits’ side of the analysis complete, it is important that attention is turned to the disclosure changes that are introduced with these new standards.
Key disclosure considerations for IFRS 9 and 15 compliant financial statements
- Even if the transitional effects of the adoption of IFRS 9 are immaterial, accounting policies must be updated and tailored to the company’s individual facts and circumstances. Ensure that terminology has been updated throughout the accounts in line with the new classification and measurement and expected credit loss impairment models in IFRS 9. Remember, the transition disclosures should enable the users of the accounts to understand fully how the new and old policies differ for material balances.
- Pay particular attention to the significantly amended IFRS 7 credit risk disclosures. It is important to ensure that the prior year disclosures are not merely rolled forward but are updated for the new, more extensive requirements. For example, concepts such as ‘past due but not impaired’ no longer exist. The old IFRS 7 disclosures are relevant for the comparative period where the option not to restate comparatives has been taken.
- A consequential amendment to IAS 1 now requires the disclosure of IFRS 9 impairment losses (including reversal of impairment losses or impairment gains) as a separate line in the income statement. It relates to all IFRS 9 impairment losses, including loan receivables held at amortised cost and trade receivables.
- Ensure you state clearly whether the simplified or general approach to impairment has been adopted, and for what financial assets.
- Don’t leave the consideration of the effect of IFRS 9 on related party assets to the last minute. Within group structures, it is common to have interest-free, on-demand loans. As these loans can be of significant value, only a small percentage of expected credit loss provision could be material. For more guidance read BDO’s Applying IFRS 9 to related company loans.
- Accounting policies must be updated, expanded and tailored to the company’s individual facts and circumstances - even if the transitional effects of the adoption of IFRS 15 are immaterial. In particular, accounting policies under IFRS 15 will often need to be expanded due to a number of new and specific disclosure requirements about how the entity recognises revenue (including information about performance obligations, payment terms, contract assets and liabilities and cost recognition). Ensure that terminology is updated throughout the accounts and that transition disclosures enable the users of the accounts to understand fully how the new and old policies differ for material balances.
- The effect of adopting IFRS 15 may be regarded as immaterial. If this decision has been based on a ‘significant judgement’, details of this judgement should be disclosed. For example, it may be judged that the point at which control is transferred under IFRS 15 is the same as the point at which risks and rewards were transferred under IAS 18: such a judgment may be one that should be disclosed and justified in the accounts.
- Pay particular attention to the new and specific disclosure requirements (typically included within the accounting policies) about how the entity recognises revenue: you may need to include information about performance obligations, payment terms, contract assets and liabilities and cost recognition. Such disclosures should go beyond a simple statement that revenue is recognised when control is passed to the customer; they should provide:
- An understanding of the nature of each main revenue stream,
- The performance obligations identified within those revenue streams,
- How revenue is recognised in relation to each material performance obligation, and
- Why this is the case.
- In situations where revenue is recognised over time, accounting policies should make clear which of the criteria in IFRS 15.35 have resulted in this treatment.
- Consider whether disclosures, such as those describing changes in contract assets and liabilities, are best presented in a table format as a reconciliation, or in a narrative format.
Read more on IFRS 15.
As with any accounting standard disclosures, there may be circumstances where the new disclosures required by adopting IFRS 9 and IFRS 15 are considered immaterial to a company. In these situations, companies should not be cluttering their annual reports with irrelevant and unnecessary information. However, it is essential that decisions to omit specified disclosures on the grounds of materiality are robustly justified.
The adoption of IFRS 9 and 15 has been a challenging exercise but, for those still going through the process, BDO has a number of publications that may be of assistance.
IFRS 9 in Practice
IFRS 15 publications
IFRS 15 - Real Estate and construction
Business Edge index